New Zealand dollar outlook: NZD/USD eyes bounce as rate cut bets near exhaustion

• RBNZ cut rates by 50bp, with more easing flagged
• NZ-US 2yr yield spread hits most negative since 2019
• 37bp of further cuts priced by April, limiting downside scope
• NZD/USD testing July downtrend support, RSI near oversold

NZD/USD Outlook Summary

The Reserve Bank of New Zealand’s (RBNZ) decision to deliver a supersized 50 basis point rate cut at its October monetary policy meeting—and its willingness to deliver more should the need arise—continues to influence the NZD/USD. That’s resulted in an unusually long stretch where the New Zealand interest rate outlook is acting as the primary driver of its movements.

However, with one-and-a-half cuts already baked into the price out to the middle of next year, it may be difficult to justify an even larger increase in dovish bets after 300 basis points of easing already delivered. Throw in NZD/USD testing a key downside support it’s bounced off on several occasions recently, and the case for further large-scale downside in the near term comes across as a tad optimistic.

Dovish RBNZ Weighs on Kiwi

Continued dovishness from the RBNZ remains a key influence on NZD/USD days after its October monetary policy meeting, dragging the pair lower as two-year yield differentials between New Zealand and the United States—which largely reflect the future path of central bank policy rates—turned the most negative since 2019 on Thursday.

Source: TradingView

As seen visually in the chart above, as spreads have turned in favour of the United States, NZD/USD has wilted, hitting lows not seen since the immediate aftermath of Donald Trump’s Liberation Day reciprocal tariff level announcement in early April. Correlation analysis backs this assessment up, with the rolling coefficient score between NZD/USD and two-year spreads on an hourly timeframe sitting at 0.78 over the past week. It’s not moving in lockstep by any stretch, but it’s not insignificant either.

RBNZ Rate Cut Bets Nearing Exhaustion?

However, with an additional 37 basis points of easing already priced into the Kiwi overnight swaps curve by April next year, essentially signalling traders see the risk of the RBNZ cash rate hitting 2% by Q2 next year as akin to a coin toss, it may be difficult to justify any further easing beyond the 300 basis points already seen unless something particularly nasty happens to the global economy or markets.

Source: Bloomberg

 

 

USD Breakout Defies Economic Risks

While that remains a risk, especially with stocks around the world ripping higher on the promise of AI riches and further rate cuts yet to be delivered, it will be difficult to gauge economic risks from the United States in the near term with almost no new data coming through due to the increasingly lengthy government shutdown.

That’s left other market drivers, such as technical analysis, to steer currency market direction. Contrary to the obvious risk posed by temporarily furloughed government workers spilling over into weaker economic activity, rather than undermine the U.S. dollar, the exact opposite has been seen with the DXY breaking to multi-month highs this week.

Source: TradingView

While it’s not a readily traded market instrument, sitting in an established uptrend and having cleared a strong resistance zone starting at 98.60, there’s room to run higher towards another prominent resistance level at 100.25 in the period ahead. Bullish momentum continues to build, hinting at the potential for further weakness in EUR and JPY against the USD given they’re by far the largest weightings in the DXY index.

NZD/USD Technical Analysis

Source: TradingView

To be sure, that suggests the Kiwi may also struggle against the big dollar. But where it gets interesting for NZD/USD is its location on the charts, currently testing the lower support of the downtrend established in early July. The pair has tested and bounced off or near the level on numerous occasions over recent weeks, and while the moves have hardly been convincing, it suggests there are still bulls willing to defend the level—even after the RBNZ’s dovish performance earlier this week.

While RSI (14) and MACD continue to provide obvious bearish signals that favour selling rallies over buying dips, both are nearing levels that suggest the pair is approaching oversold territory. They’re not there yet, but they are close. Combined with the already dovish New Zealand rate outlook, which may struggle to grow any further in the near term, it suggests there’s still grounds to buy dips around downtrend support—as long as risk management remains the key factor when assessing potential setups.

Longs could be established above the trendline with a tight stop beneath for protection. It would be preferable to see an initial test and failure before entering positions. As for targets, 0.5800 screens as an obvious candidate given it’s acted as both support and resistance on multiple occasions over the past two months. Depending on the price action at the level should it get there, traders could then assess whether to cut, hold, or reverse, with the 200-day moving average the next logical topside candidate for longs.

On the downside, a break and close beneath downtrend support would open the door for potential short setups, with very little technical support evident until 0.5640. However, while selling rallies remains the preferred longer-term strategy right now, as discussed above, entry around these levels means you’re essentially betting on something fairly nasty happening to the global economy.